Working capital refers to that part of total capital, which is required for holding current assets. It is calculated as excess of current liabilities. Determinants of working capital are:
Factor that determine working capital of a company are:
i. Nature of Business: The working capital requirements depend upon the nature of business. For instance,
a. In Small trading concern or retail shop, requirement of working capital is small because operating cycle period is small since:
- They mostly have cash sales
- They carry small quantities of goods in stock.
b. In large trading firms or Departmental Stores dealing in large variety of goods, requirement of working capital is large because operating cycle period is larger since:
- They require large quantities of goods in stock
- They carry large debtor balances.
c. In manufacturing firm, requirement of working capital is large because operating cycle period is larger since:
- They carry large quantity of raw materials.
- They carry large quantity of work in progress.
ii. Scale of operations:
a. For organizations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high.
b. Such organizations, therefore, require large amount of working capital as compared to the organizations which operate on a lower scale.
iii. Business cycle:
a. In case of a boom the sales as well as production are likely to be higher and therefore higher amount of working capital is required.
b. As against this, the requirement of working capital will be lower during period of depression as the sales as well as production will be low.
iv. Seasonal factors:
a. In a peak season, because of higher level of activity higher amount of working capital if required.
b. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.
v. Production cycle:
a. Production cycle is the time span between the receipts of raw material and their conversion into finished goods.
b. Some business has a longer production cycle while some have shorter one. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firm having shorter processing cycle.
